Before We Start: A Quick Update
Normally, I don’t give specific stock picks in the Deep Earth Newsletter. My trading style necessitates quite quick entry points and some detailed position management techniques, so limitations of timing and space make this an unsuitable vehicle for that kind of thing.
Last week, though, I made an exception to talk about a couple of “big picture” themes that led to a couple of picks, KMI and EPD.
So far, so good with them. If you bought both at Friday’s opening, both would now be in profit, but they are long term trades, so it is really too early to call right now.
Now, back to our regularly scheduled programming…
WTI: A Rumor Driven Market
In some ways, as chaotic as they have been, the last couple of months in the WTI futures (CL) market have been quite refreshing. The moves have been wild, but at least they have been based on things that are actually happening.
There are a lot of similarities between energy and the interbank forex markets where I got my start, but one of the most frustrating for retail traders is a tendency to trade based on rumors. This week saw a return to just that.
With rigs closing down all-over North America, just as the economy began to grind back into gear and people started driving again, the stage was set for a quick transition from a massive glut of crude in the U.S. to a short-term shortage.
From a fundamental perspective, that meant that not only should the move up continue, there was also a good chance that it would accelerate significantly this week.
The technical setup for WTI was great, too. A week of steady gains had taken it close to the $36.08 level that represents a 50% retracement of the big drop. In theory a break of that level should have been a very bullish sign, with a nice big gap from back in March to fill on the way up.
Almost as soon as 36.08 was breached, however, CL retreated back below the line.
The primary reason was rumors doing the rounds that the upcoming OPEC+ meeting would be contentious, with accusations of cheating in the agreed cuts.
Should You Pay Attention?
The simple answer to that question is no.
That is not because I am opposed to trading off rumors, nor that I think they are usually wrong. In both cases the opposite is true, but this is a bit different.
Firstly, forecasting contention at an OPEC or OPEC+ meeting is a bit like me forecasting that at some point, a bear will relieve himself in the woods. These meetings generally are contentious, at least as they approach. Behind the scenes, however, when the chips are down, the participants usually come out of them making the right noises.
Equally unsurprising is that cheating on an agreement and lying to other OPEC members about real output levels is being accused. That has happened often in the past, and probably will happen again in the future.
The breakdown in communication and tit for tat output increases that we saw in March were so shocking to the market precisely because, despite the frequent disagreements and the cheating, such things are extremely rare. It is only reasonable to think that Russia, Saudi Arabia and others will have been somewhat chastened by that reaction and somewhat reluctant to force the same thing again.
It should come as no surprise, then, that this morning, there is talk, not of a collapse of the existing agreement, but of an extension to the cuts.
That is quote a 24-hour turnaround in what is being leaked!
Where Do We Go From Here?
So, if the rumors of a disastrous disagreement are just rumors, and there is even a chance of extending the OPEC+ cuts, everything is back in place for a continued, sustained run up in the short to medium term. 36.08 now becomes a solid support, and a complete fill of the gap up to 41.05 now looks to be on the cards.
Given the level of distrust and dislike between Iraq, the largest member accused of non-compliance, and many of their Middle Eastern neighbors, it is still possible that the planned meeting will run into problems. But after such a huge drop just a couple of months ago, patching up differences will have a lot of appeal. In short, a band-aid is more likely than a bust up.
So, in general terms, I think now may be a good time to add some of the riskier stocks to your energy portfolio. Most of these are not things to hang onto for a long time, but a decent pop in the short-term, should oil keep moving higher, could make them extremely rewarding over the next couple of weeks, and maybe even months.